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Wednesday, January 31, 2007

Ride the Fed to "GLD"ilocks

The Federal Reserve helped out the cyclicals & commodities on Wednesday, with their endorsement of the economy, saying: "Overall, the economy seems likely to expand at a moderate pace over coming quarters. Readings on core inflation have improved modestly in recent months, and inflation pressures seem likely to moderate over time."

Some last-minute numbers contributing to the Fed's decision included a surprising 3.5% GDP from Q3's 2.0%. While the number cured the permabear recessionary fears, it also told us the Fed should be on pause until the April meeting - at the earliest. Not to be outdone, the Chicago PMI came in at 48.8. Low inflation + Growth = A Goldilocks Economy, and the Market rallied in response.

Traders were timid to move into Gold on Tuesday, ahead of the Fed, despite a huge 5%+ rally in Crude Oil. After the manufacturing number, weaker dollar and Fed statement on Wednesday, Gold contracts moved up nicely to close at $657.9.

The 10 year note is near 5%. GDP is stronger than anticipated. Cyclicals are strong, and we can still see rate cuts in the second half of the year. Still 8 points under its 52-week high, I believe there is room for Gold to stretch its legs - and the best way to play this is the streetTRACKS Gold Shares (NYSE:GLD) ETF, which tracks the commodity price itself.

Look at the intra-day chart below for (GLD). All traders needed was the strong GDP number @ 8:30 A.M. to trigger the rally at the opening bell:

Furthermore, look how (GLD) has tested and maintained the support level of $60. To add to that, I've included a 20 period MA with Bollinger Bands. Look how the bands constrict up until the most recent rally, then diverge & open up. Keep an eye on the upper limit band as it should continue to trend upwards with the rally. [click for full view below].

Finally, if you pull up the Dollar Index 1-year chart, pay close attention to the moving average. It's been in a free fall slide, and I don't see anything that makes me think it will get its act together anytime soon. In my opinion, gold downside is minimal and upside potential is another 8% or more.

Sentiment: BuyDisclosure: I have no position in (NYSE:GLD). Again, just a reminder that this article is for informational purposes only, and is not a recommendation to buy or sell any security.